Real Estate Funding In A Recession: Key Considerations

February 16, 2023

How does a recession affect real estate markets?

During recessions the real estate market can be affected in a few ways including but not limited to:

Decrease in Property Prices: as the demand for property reduces and the supply of homes on the market increase, this could in turn lead to a decrease in property value.
Decrease in new construction: As demand for housing decreases and property values fall, developers are not likely to start new construction projects due to a higher chance of long-term vacancies should the recession not subside.
Increase in Foreclosures: property owners affected by layoffs may find it difficult to keep up with their mortgage payments thus increasing the risk of foreclosure.
Difficulty in renting properties and selling properties: as people lose their jobs or have reduced money to spend, they may find it difficult to make their rent on time or be unable to find the budget to spend on a new property. This in turn could lead to increased availability of properties reducing the price.

These are just some of the impacts of a recession on the real estate market. However, with this volatility also comes opportunity. Savvy investors may be able to secure great deals due to there being more motivated sellers in the market as well as more deals such as foreclosed property auctions and stalled new property projects. Many times having a long term investment strategy during a recession can pay off with increased profits as markets normalize after the recession and the deflated prices rebound on the increasing demand for property and housing. However, should you be willing to take a calculated risk and invest during these unsettled times a key consideration should be how to secure funding for said investments.

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What about real estate funding opportunities?

During economic recessions, most traditional forms of real estate funding are impacted just as in other industries and markets. The impacts listed above have a tempering influence on the willingness or ability of most financing institutions to grant loans against real estate investments.

Banks and financing companies usually increase their lending standards to safeguard against increasing defaults due to unemployment and reduced income, making access to financing out of reach of many people already feeling the pinch of the turbulent period.

Additionally, to compensate for increased perceived risk, interest rates are also generally increased as well as larger down payments are required.

They may also take a long-term view on investments, understanding that markets will rebound in time, as well as diversify their portfolio into less risk-averse projects to weather the difficult period. For the potential investor, this does mean that the right project that falls within the institution’s risk tolerance margin, may still be able to secure funding, albeit usually at more demanding conditions. There are a couple of things you can do to still secure funding during a recession to invest in projects that may be available at discounted rates.

Maintaining a strong credit history: A strong credit history can make it easier to secure funding at any time, but this proves more true during a recession as institutions want to ensure to reduce risk as much as possible.
Have a solid business plan: Lenders may want to see a successful business plan outlining how an investor will acquire or manage the property profitability and special care should be taken to study and allay the concerns brought on by the recession as well.
Having a substantial down payment: This can help secure funding during a recession as it reduces the lender’s risk.
Partner with others: Partnering with another investor can be strategically advantageous during recessions, as it can provide extra capital and reduce risk
Be flexible: It may be difficult to get the terms and conditions of the loan that you desire due to the more cautionary approach taken by institutions. Being willing to accept less favorable terms for financing that would still allow you to reap profits on a discounted property may still be worthwhile in the long run.
Seek alternative financing options: When the economy struggles, typical mortgage loans may no longer be an option or too difficult to qualify for so borrowing parties should consider alternative financing solutions such as private money loans, hard money loans, or crowdfunding.

Conclusion

Turning adversity into opportunity is never easy, however, a long-term strategy and being able to finance a deal to take advantage of the oversupply of property can still be a way to generate returns that play against market trends. However, always invest with care, recessions can be a great way to score some big deals, but they can also be a time when uninformed, careless investors can lose it all.

Navigating the uncertain waters of a recession is always going to be tricky, but there’s certainly opportunity to be had in this instability. Oftentimes it’s only the availability of funds that stops you from sealing the deal on that undervalued home or winning an auction on a foreclosed commercial space. Don’t let that hold you back by talking to our specialists at RE Investor News. Whether it’s a boom or recession we have the contacts and expertise to always match investors with trusted lenders who are willing to take a calculated bet on the right investor and project. Reach out now and let us bridge the gap between potential and realization.